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Commercial credit demand declines amid market uncertainty

The third quarter of 2023 saw a substantial decline of 5.2% in commercial credit demand, marking the most significant year-on-year drop since 2021, according to the latest data from Equifax, a leading credit information and analysis provider in Australia and New Zealand.

As revealed in Equifax’s Quarterly Commercial Insights for September 2023, the reduction in overall business credit demand was primarily driven by a sharp decrease in business loan applications (-8.8%) and trade credit applications (-3.5%) in Q3, compared to the same period in the previous year. Notably, asset finance applications defied the trend, showing a notable increase of +5.2% during the same quarter.

Insolvency rates at the overall market level exhibited an alarming +11% increase in September 2023 compared to the same month in 2022, and a staggering +128% rise compared to the same month two years ago. The construction industry accounted for the highest share of insolvencies, representing 31.5% of all recorded cases.

Scott Mason, General Manager of Commercial and Property Services at Equifax, explained, “Higher interest rates and general market uncertainty have dampened trade credit and business loan demand in this quarter, contributing to a more significant drop in overall commercial credit demand than anticipated. This decline has been exacerbated by reduced discretionary spending due to declining household savings ratios and weakened consumer purchasing power, placing additional pressure on businesses. Nevertheless, demand still remains above pre-pandemic levels.”

According to Equifax’s data, the 2022-23 financial year witnessed the lowest growth in the number of Australian businesses since the 2019-20 financial year. The year ended with a net growth rate of 0.8% in the number of Australian businesses, featuring an annual entry rate of 15.8% and an exit rate of 15.0%. This marked a significant decline from the previous financial year, which had a net growth rate of 7%.

Mason added, “The challenging economic environment is impacting many businesses, with several of Australia’s largest industries experiencing negative growth in their overall business numbers. For instance, the construction industry reported its first negative growth in business entities since 2019, with all construction subdivisions displaying higher exit rates compared to previous financial years, and a record high number of defaults, which were 25% higher than the previous financial year. Similarly, the retail sector is feeling the effects of reduced consumer spending, with a -1.4% decline in business entities during the 2022-23 financial year, compared to a +7.1% growth in the preceding year.”

Comparison of Business Credit Demand in September 2023 vs. September 2022:

Overall business credit applications decreased by -5.2% in the third quarter of 2023. Western Australia (WA) and South Australia (SA) were the only regions to experience growth in overall business credit demand, with increases of +6% and +4%, respectively. Meanwhile, Victoria (VIC), New South Wales (NSW), Australian Capital Territory (ACT), Tasmania (TAS), and Queensland (QLD) all witnessed declines.

Business loan applications fell by -8.8% in Q3, with the most significant decreases occurring in VIC (-14%), NSW (-13%), and ACT (-10%), followed by TAS (-5%) and QLD (-3%). In contrast, WA (+7%) and SA (+4%) saw an increase in business loan demand.

Trade credit applications declined by -3.5% in Q3 2023, with all states either experiencing stagnation or recording a decline. WA remained unchanged, while NSW (-7%) and TAS (-7%) reported the most substantial decreases, followed by ACT (-4%), QLD (-3%), SA (-2%), and VIC (-1%).

Asset finance was the only commercial product category to report a year-on-year increase in the September quarter, showing a +5.2% growth. SA (+9%), WA (+7%), and VIC (+7%) experienced the most significant increases in demand, followed by NSW (+5%) and QLD (+3%). Conversely, the ACT (-4%) and TAS (-1%) observed a decline in asset finance demand during this quarter.

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